Generally, when you do your microeconomics class you get to see isoquants. I mean, I hope you get to see them (some principles class dont introduce them and are left to intermediate classes). But when you do, they look like this:

Its a pretty conventional approach. However, there is a neat article in History of Political Economy by Peter Lloyd (2012) titled “the discovery of the isoquant“. The paper assigns the original idea, rather than to the usual suspect of Abba Lerner in 1933, to W.E. Johnson in 1913 as A.L. Bowley was referring to his “isoquant” in a work dated from 1924 (from which the image is drawn). But what is more interesting that the originator of the idea is how the idea has morphed from another of its early formulations. In the 1920s and 1930s, Ragnar Frisch was teaching his price theory classes in Norway and depicted isoquants in the following manner in his lectures notes.

Do you notice something different about Frisch’s 1929 (or 1930) lectures relative to the usual isoquants we know and love today? Watch the end of each isoquant. They seem to “arc” do they not? How could an isoquant have such a bent? Most economists are probably so used to using isoquants that do not bend (except for perfect complements) that it will take a minute to answer. Well, here is the answer: its because Frisch was assuming that the production function from which the isoquant is derived had a maximum which means that the marginal product of an input could become negative. This is in stark contrast with our usual way to assume production functions as smoothly declining (but never negative) marginal products. This is why Frisch includes an arc to this shape (a backward bend).

Why did we move away from Frisch’s depiction? Well think about the economic meaning of a negative meaning marginal product. It means that a firm would be better off scaling down production regardless of anything else. Its a straightforward proposition to understand why in all settings, a firm would automatically from such an “uneconomic” zone. In other words, we should never expect firms to continually operate in a zone of negative marginal product. Ergo, the “bend”/”arc” is economically trivial or irrelevant. Removing it simplifies the discussion and formulation but also does something subtle — it sneaks in a claim rationality of behavior from firmowners and operators.

This is a good setup for a question to ask your students in an advanced microeconomics class that isnt just about the mathematics but about what the mathematical formulations mean economically!

The Ukraine is as of this writing holding its ground and cities against the invading Russian army. There are a host of reasons, from incredible Ukrainian bravery, unmatched global sanctions clamping down on the Russian economy, to tactical and military failure on the part of Russia. There is nothing I can contribute beyond the linked sources or the constant flow of information coming out in real time. What I would like to add is one bit of broad economic context.

Baumol’s famous “cost disease” idea works like this: as a society gets richer the opportunity cost of everyone’s time increases. This makes certain services, like getting a haircut, more expensive because there is no substitute for a person’s time, no technology to increase labor efficiency, when it comes to cutting hair. Economists never stop speaking of the opportunity cost of time, but I sometimes think we undersell the importance of the concept. Lives are finite, time is the only thing that matters. To say that the opportunity cost of time has increased is to say that lives have been made better. Baumol’s cost disease restated: Anything that improves a person’s life makes claims on their time more dear.

The same logic applies to risk and to armies. Military technology continues to advance, but there as yet remains no substitute for soldiers, particularly if you want to occupy territory (there are plenty of superior substitutes if you just want to take lives and scorch the earth, but thats a different story). While the “labor productivity” of soldiers as occupying forces has remained relatively stagnant, the lives of the soldiers themselves has improved with everyone else’s. As their lives improve, the bar for what they are willing to risk their lives (and their conscience) for gets higher. For Ukrainians defending their homes and families from invaders, the risk is more than worth it and they are awing the world with their bravery everyday. Russian soldiers, on the other hand, are surrendering, scrolling Tinder, and abandoning tanks.

When historians point to generals making the mistake of fighting the “previous war”, they are usually referring to the obsolescence of tactics by new military technology. What I would like to consider is the possibility of Putin trying to fight a war with the previous soldiers. The last time the Russian army marched into a country prepared to offer significant resistance was the Soviet invasion of Afghanistan (Crimea, to my understanding, was never in a position to offer significant miltary resistance). Russian soldiers and their families today have very different lives. Only a quarter are conscripts, and none are facing a life without options outside of the army. The state is not the sole means of earning a living. The Russian market may be fractured and corrupted by a kleptocratic regime, but it’s still a market, one which has led to tremendous improvements in the quality of life enjoyed by citizens. These aren’t men and women enlisted into a religious or philosophical crusade, let alone ordinary men and women fighting to keep their homeland. Soldiers have lives they don’t just hold dear for the sake of survival – they have lives in the modern world they actively enjoy.

There have been no shortage of pundits who, in the form of cliched memes and cosplay masculinity, have speculated that nations of the developed world would not sufficiently come to the aid the Ukraine, or any country invaded by a foreign power, for the simple reason that we have, in our modern decadence, grown soft. What they consistently fail to appreciate is that this is a great outcome. People holding their lives with greater value is the very definition of progress. What is most perplexing, however, is why this idea of softness born of wealth is not applicable to Russians. (As for the theory that the Ukraine would fold overnight because it doesn’t make enough babies, that theory looks less viable, even if Russia achieves any of their goals.)

Working down the supply chain

Now, let’s be clear: soldiers are soldiers, and they are still more likely than not to obey orders and carry out their duties, if nothing else then out of a sense of obligation to one another. The opportunity cost effects of improved private lives are no doubt dampened. But armies depend on a lot more than just soldiers.

Russia remains, relative to the West, a poorer country in terms of GDP per capita, but nonetheless a modern economy where individuals enjoy the luxuries of a developed economy: mobile phones, heat in the winter, food security, transportation, etc. History is filled with stories of wars won and lost because of lack for boots, gasoline, and coats. In the Soviet Union, the army may have been underprovisioned relative to their counterparts from wealthier market economies, but they weren’t beholden to the rules of a market economy. Exclusion from a global system of payments wouldn’t be able to immediately choke off resources. Even if the soldiers marching are entirely severed from their lives in the private market, the supply chains they depend on are not, and the civilians in that supply chain expect to get paid.

Did Putin expect that supplies would arrive while the Ruble plummeted? Did he expect middlemen to incur losses as the entire economy was frozen by global sanctions? Did he expect reliable logistical support from soldiers and civilians while their spouses lined up at ATMs during bank runs? You know what? Maybe he did. Or at least, maybe he thought that the Ukraine would capitulate before sanctions could become salient to the supplying of his army. I have no idea. What I want us to consider is that modern armies depend on more than soldiers to function. Without a monopoly on means for supporting a family or an omnipresent threat of the Gulag, armies depend on citizens who can look at the physical and economic risk they are taking on, and coming to the conclusion that “this is worth it.” I have a hard time believing any Russian citizen, wage earner or oligarch, is looking at what is already an economy-enveloping sinkhole borne of greed for historical infamy, and thinking this is worth it for anyone but Putin himself.

This context of war in a time of better lives places economic sanctions as a geopolitical tool in a new light. Most countries cannot hope to put together an irresistible military force without the resources of a modern developed economy. A modern developed economy will invariably lead to wealthier citizens with a greater opportunity cost of time and risking their lives. The military will, in turn, become more dependent on private citizens to provision their armies. Sanctions in this new world don’t just punish citizens and encourage some form of open revolt, they actually choke off the military from the economies they remain entirely coupled to and dependent on.

If Putin is repelled, it will more than anything be because of the bravery of 44 million Ukrainians who stood their ground and protected their homes. But the military lesson, the historical lesson, may very well be that men and women with good lives make for poor invaders. The best, most peaceful future might just be one where we all have too much too lose.

Brief Addenum: How this “cost disease” effect would impact the probability of a nuclear strike is complex and in no way clear to me. On the one hand, if Putin believes that he has no possibility of victory without a credible threat of a strike, then it raises the possibility of war, if only through greater chance of error admidst readiness. On the other hand, it’s not like there are no middlemen between Putin and “the button.” Each link in that chain may be more likely to be insubordinate if they view their modern life as too great a sacrifice. I just don’t know.

This is the title to a paper in Historical Methods that I believe should convince you of two things. The first, and this applies to scholars in economic history, is that the journal Historical Methods is a highly interesting one. It tends to publish new and original work by economists, historians, sociologists and anthropologists who are well-versed in statistical analysis and data construction. The articles that get published there often offer a chance to discover solutions to longstanding problems through both interactions of different fields and the creation of new data.

The second is that it is becoming increasingly harder to hold the view that the industrial revolution was “a wash”. I described elsewhere this view of the industrial revolution as a wash as believing one or more of the following claims: “living standards did not increase for the poor; only the rich got richer; the cities were dirty and the poor suffered from ill-health; the artisans were crowded out; the infernal machines of the Revolution dumbed down workers”. Since the 1960s, many articles and books have confirmed that the industrial revolution was marked by rising wages and incomes as well as long-run improvements in terms of nutrition, mortality and education. The debates that persist focus on the pace of these improvements and the timing of the sustained rise that is commonly observed (i.e. when did it start)

The new paper in Historical Methods that I am mentioning here suggests that these many articles and books are correct. The author, Pierre Lack, takes all the 19th century pamphlets published in Britain and available online to analyze the vocabulary contained within them. Lack’s idea is to use the fact that books became immensely cheap (books were becoming more affordable through both falling prices and rising incomes — see table above) to evaluate emotional well-being by the words contained in them. What Lack finds is that there were no improvements in emotional well-being as proxied by the types of words in those pamphlets.

But how could this be positively tied to the industrial revolution as not being a wash? This is because, if you believe that there is such a thing as a hedonic treadmill (i.e. more income only allows us to actualize upward our preferences so that the income has no impact on happiness), you cannot hold many of the beliefs associated with the industrial revolution being a wash. For example, if you think that living standards for the poor did not rise while other dimensions of their well-being (e.g., health, environment of the city, working conditions) fell, then there the graph produced by Lack should have exhibited a downward trend!

This is not the only belief associated with the “industrial revolution was a wash” view that cannot withstand Lack’s new paper. One frequently advanced factor that purportedly affects emotional wellbeing is inequality. Because we care about our relative position (e.g., I am happier if my neighbor have a worse car than me), rising inequality should be associated with falling emotional well-being (that was for example the case that the Spirit Level of Wilkinson and Pickett tried to advance). However, if you believe that Britain enjoyed rising inequality (it did at first and it then fell according to Jeffrey Williamson who shows that inequality rose to 1860 and fell to 1913), then Lack’s data should show falling emotional well-being. It does not which means that it is quite hard to hold the view that the revolution was a wash.

This is probably my favorite paper at Historical Methods and I hope you will like it too. I also hope that you will add it to your list of articles to inform your own research.

There’s a concept sometimes floated in academia of being “overqualified”. The story usually starts with a PhD in something either extremely narrow in focus or difficult to imagine having an application in the private sector, and ends with the subject either excluding the PhD from their resume or driving a taxi. The idea is simple – this advanced degree that took years of intense study and effort to acquire has negative signal value in the broader marketplace. It’s the most brutal anecdote highlighting the failure of the Labor Theory of Value I know of.

I think something similar happens with reality television stars. They acquire a level of public awareness and notariety a rung below classic celebrities, but still multiple orders of magnitude more than the average citizen. If they become sufficiently famous they can earn rents off this notariety, at least in the short run. In the long run, however, the source of their fame is external to them (i.e. the show they were featured in), but have no immediate means to keep generating the exposure and public interest. The real problem, however, arrives if they try to re-enter the traditional labor force. They have a huge gap in their resume that requires explanation and haven’t been building human capital in any classic trade (and I very much include acting as a classic trade). Fame makes for fleeting human capital. Fame as capital decays rapidly, while the associated notariety serves as a tax that persists long after that fame has dissipated. This tax most often takes the form of casual harassment, but also includes threats to their privacy and safety. They may find themselves presented with opportunities to appear at bars, concerts, or county fairs for small fees, but these financial stop gap solutions only serve to further maintain what is now costly notariety while still failing to invest in any human capital with long run value.

Which brings me, of course, to JD Vance.

https://twitter.com/EggerDC/status/1495391630668578819?s=20&t=MG7JgWlcefO-kxOBr4-gHw

Cards on the table, I suspect Mr. Vance is not particularly brilliant, but I also doubt he is a complete fool. What I do think is that he has trapped himself in a career path not dissimilar to a reality TV star. Much in a way that a lot of bachelors and bachelorettes think they can build a Kardashian-esque career, Vance thought he could be another Trump. He wrote a successful book and that was made into a film. He dabbled in venture capital and, much like Trump, probably failed (though I can’t really say). What he saw, like Trump, was a path from fame to a career being compensated for that fame. There’s a real chance that it’s not going to work, and forwards inducting from a failed political bid that has included consistently foolish proclamations in an effort to pantomime populist-Trumpism, he doesn’t like what he forsees. Being fame-trapped into a red state fairground fear-mongering stooge might be a way to make a living, but it’s not a living he is particularly excited about.

Fame is a zero-sum tournament, and like a lot of such tournaments the top prize is extremely lucrative. Unlike the basketball or golf, however, the losing here isn’t just costly, its potentially scarring. In this way, it’s a bit more like selling cocaine. You can live a very good life for a while, but if you lose you’re going to have a tough time succeeding at anything else down the line. JD is a shooting his shot, but I don’t think he’s making these sort of aggressive attacks on public figures because he’s excited about being a Senator so much as he’s scared of trying set up a quiet law practice in Ohio and spending the rest of his life explaining to folks he knew in high school what went wrong.

Headlines have moved on from the The Great Resignation to the The Return of Inflation, which is completely normal as far as news trends go. But I think it’s worth reflecting on how the two can be related.

I was privy to a conversation with a local food+retail business owner yesterday where she revealed she was no longer comfortable hiring teenagers for summer and after-school jobs. Not because they were inadequate to the task, but because they had to endure too much abuse from customers eager to take advantage of young people in a service position. She was confronted with a decision: either operate understaffed, increase prices to cover the cost of older employees, or completely reorganize her business model.

Behind the wave of Great Resignation articles and opinion pieces, there has been a subcurrent of related articles about increasing customer predilection for abusing employees. Whether the rate has increased or simply its observation is hard to say, but the phenomenon itself appears to be real and non-trivial. Working in retail and food service jobs has in many ways deteriorated in job quality. The first line of investigaton and blame is always management, but it looks like customers are on the hook this time as well. Karen-wants-to-speak-to-the-manager memes didn’t emerge from nothing, folks.

No shortage of ink has been spilled about stagnating wages, particularly for workers without college degrees. Such discussions, however, always exist within a framework that holds the work, and what it entails, constant. If the quality of life on the job declines without an increase in compensating wage differentials, then the true (net) wage compensation has actually decreased even when nominal or real wages remain ostensibly constant. Combined with a pandemic that made service industry work more dangerous, the precipitous increase in wages necessary to maintain a labor supply sufficient to production demands makes all the more sense. Did we really think we could live in a world where McDonald’s is offering $20/hr to start but prices would stay the same?

Now, let’s be clear, I’m not suggesting that current inflation is being driven by crappy customers eager to abuse anyone they can in a fit of narcisstic rage. But I am suggesting that it, and factors similar to it, is a non-trivial part of the recipe. The market is very good about pricing-in everything associated with the supply of a good, but that doesn’t mean there aren’t frictions and associated lags along the way. Employees and their lives are sticky, and sometimes it takes an exogenous shock to dislodge them from one equilibrium to the next. If we were so eager to accept the hypothesis that the stimulus checks and health concerns were sufficient to get people to quit, we should be no more surprised that they are returning with higher reservation wages than previously, and that these new reservation wages are getting priced into the market. Combined with an utterly flummoxed set of global supply chains and growing geo-political uncertainty, all on top of nearly $2 trillion in stimulus spending, growing prices seem a fairly natural outcome.

Returning to the original thesis: compensating wage differentials are as unavoidable as every other economic phenomenon borne of people making rational decisions given the information at hand. A generation of employees have discovered that bosses may be dour, insensitive, and obsessed with bottom lines at the expense of their employees well-being, but at least they need you. They have to see you at work tomorrow and reap the relationship they’ve sowed. There is an equilibrium of mutual respect and shared objectives to be reached there that is best for everyone, even if a lot of bosses can’t seem to get out of their way when building it.

Customer are a different beast altogether. It’s hard for us coordinate and there’s little we can individually do to punish those who opt to abuse the people serving us. We’ve got a common pool resource problem – a subset get all their gross benefit of being jerks while the cost is spread across everyone. Whether it’s refusing to wear masks, threatening violence, or verbally abusing young people, each and every one of those incidents gets steadily priced in, until one day we’re all just staring in shock at $6 hamburgers and asking what happened. I tell you what happened: the Karen Tax, and we’re all paying it.

I’m not delusional. I know we can’t boycott our family, co-workers, and acquaintences who abuse service workers. But maybe we can all agree to give them just a little more sideeye. Invite them to fewer lunches. Leave them out of the will. Because that’s the price that really needs to increase.

It’s time they paid the Karen Tax.

Canadians are blocking a bridge. For Americans who like to engage in stereotypes about Canadians, this is inexplicable (even though the practice of blocking things in Canada is not new by any means). However, for me as an economist, it is entirely explicable.

Consider what vaccine mandates/passports (which is what initiated the current mayhem) do in pure economics terms: they raise costs for the unvaccinated. They do not alter the benefit of being vaccinated. All they do is raise costs. People could be more or less inelastic to this cost, but the fact that many are willing to spend time and resources (fuel, wear and tear of trucks etc.) to prevent such policies from continuing suggest that their behavior is not perfectly inelastic.

How elastic is it then? Well, we can see that by looking at what happens when we alter the benefit of being vaccinated. This is the case with vaccine lotteries. The “extra” benefits associated with a lottery is that the unvaccinated obtains the value of the vaccine plus the expected value (i.e. the probability) of winning a particular prize. One recent paper in Economics Letters finds that for $55, you can convince an extra person to be vaccinated. That is basically the cost of administering a lottery plus the prizes themselves. That is a relatively cheap way to increase the benefit for the unvaccinated in order to have them change their mind. Another paper, in the American Journal of Health Economics, finds a similar results by concentrating on the Ohio vaccine lottery. The difference is that the amount is $75 instead of $55. Still, pretty cheap for an extra vaccinated person and the generally high social benefit of a vaccine in terms of avoided costs of infections/hospitalizations/deaths.

Thus, we can say that behavior is quite elastic. But this is where the rub comes. When you raise the benefits in this case, the story is over. There is nothing else that happens after that. When you raise the costs, people might resist and adopt other measures to avoid the costs. This includes blocking bridges on the US-Canada border. And what is the social cost of that attempt at avoiding the cost of the coercive private-cost-increasing policy? Pretty high. Probably higher than the cost of a lottery system or other voluntary programs that play with the marginal private benefit of being vaccinated.

The point I am trying to get across to you is quite simple: persuasion works because it essentially increases the perception of benefits from doing X or Y activity. Coercion is impose a private cost of not doing X or Y with the potential downside that people respond in ways that create socially detrimental outcomes. Yup, coercion isn’t cheap.